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August 03, 2011 at 10:37 AM
In the lead story in the 2011 Top Wealth Managers Survey Special Report, we discussed the overall findings of survey respondent. In the second article plumbing the survey findings, we explored the services offered by firms and the prices they charged for those services.
In this, the third article in our Top Wealth Managers Special Report, we focus on a key measure related to firm profitability: productivity of all staff members of a firm.
The profitability of a wealth management firm is a direct function of the productivity of its professionals and its staff.
Other surveys have shown that close to 75% of all expenses in a wealth management firm are related to compensation and training of the staff. This is why achieving higher productivity is critical for the financial success of a firm.
The revenue per staff is a good measure of the overall productivity of the firm and its ability to achieve a return on its human capital investment. The ratio does not discriminate between the different functions in the firm—including investments, advice, operations and administration—but it does provide an overall sense of the use of people in the firm.
Productivity ratios continue to improve across every type of firm. The largest firms in the report generate on average $269,524 per staff member, compared to $244,373 for midsize firms and $203,115 for small firms. It is important to note that these apparent economies of scale are a function of leveraging certain functions in the firm. Most of all, the functions that are leverageable with size are:
- Executive management (CEO, managing partner, COO, CCO, etc);
- Investment research (relatively fixed investment for the creation of a department);
- Portfolio management (will grow in size but not nearly as fast as the AUM);
- Internal IT;
- Accounting and HR administration;
- Internal administration (executive assistant, receptionist, etc.).
The ability to leverage those functions allows firms to achieve higher productivity per staff member. However, these functions are often created at a larger firm size resulting in a slight drop in overall productivity as the firm grows before it starts leveraging the new capability.
For example, the investment research department may not even exist until the firm reaches $1 billion in AUM and at that point, the addition of the new professionals will temporarily reduce productivity. Therefore, while the largest firms have always shown the best productivity ratios in the survey, the midsize firms have at times appeared less productive than the small firm category.
